Guide: Understanding Ways to Build Credit
Maintaining a healthy credit score and finding ways to build credit is a crucial part of building solid finances. A good credit score can open innumerable financial doors. To maintain the best possible credit score, it is important to understand how credit works and the factors that are used in its measurement.
Credit scores can fluctuate over a person’s financial lifetime. It is crucial to understand ways to build credit in order to rebuild when things have gone wrong. It is also important to find good ways to build credit so that individuals can use their credit mindfully and improve their credit score with each billing cycle.
Some common questions regarding this subject include:
- What is my best way to build credit?
- How can I start to build credit with no credit history?
- Can I use credit cards to build my credit?
To answer these questions and more, AdvisoryHQ has compiled an exhaustive guide to help users understand how to use their finances in the best way to build credit. Each aspect has been examined and streamlined to help users master finding ways to build credit and control their own credit score.
What is Credit?
Credit, in its most basic form, is a customer’s ability to obtain goods or services without payment based on the understanding that payment will be provided in the future. Building good credit is the result of trust between a company and a customer that payment will be rendered.
When people talk about building good credit, they are actually referring to a credit score as measured and reported by a credit bureau. Credit bureaus gather and publish objective, measurable scores that gauge a customer’s ability to repay credit that is extended to them.
Prospective lenders are able to access these credit scores to help them assess how much trust to place in a relationship with a new customer. Building good credit is very important because it allows customers to enter into new relationships with businesses quickly and easily.
Individuals are able to build good credit by acting responsibly with their finances. Generally, credit scores are based on how reliable a person has been on making their obligatory payments; that information is used to assess how reliable they will be in the future. However, customers can only build good credit based on payments and activity that are reported to the bureaus.
There are many different methods used to calculate credit scores. Each method is slightly different and can produce different results based on identical information. This means that it is possible for an individual to have several different credit scores, some higher and some lower. To develop ways to build credit, users must consider each different score.
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When building good credit, it is important to understand that each credit score is based on a number of factors. Though they are all different, most methods generally include:
- Payment history
- Credit utilization
- Age of credit
- Mix of credit
- Credit inquiries
The best ways to build credit will focus on these factors. Customers can build good credit by understanding how a score is calculated and adjusting their financial habits accordingly.
How to Build Credit with No Credit
One of the easiest ways to build credit is by making reliable payments on preexisting accounts. However, customers who do not have preexisting accounts must often figure out on their own how to build credit with no credit. Getting a foot in the proverbial door can be difficult, but not impossible.
Report Rental Payments
Understanding how to build credit with no credit may mean getting creative. For example, many people unknowingly make applicable payments each month.
One of the best ways to build credit with no credit is through rental payments. Rent payments can usually be added toward a credit score, but they are often not reported to a credit bureau. Many landlords or rental companies do not submit credit reports simply because it is not required.
Rent payments can go a long way toward building good credit once they are reported. A few different companies offer rent-reporting services, like Rental Kharma and Rent Track. These companies offer users the opportunity to report their regular rental payments and might be one of the best ways to build credit with no credit.
Apply for a Credit-Building Loan
There are other good ways to build credit. For instance, a credit-building loan is a solid option for building good credit with no credit foundation.
Credit-building loans are one of the best ways to build credit because they are designed specifically to help loan holders improve their credit scores. They are very different from traditional loans and work in a surprising way.
Loan holders can apply for a loan of a particular amount and make payments on it regularly. When they have paid the loan amount in full, only then will the funds be released. Credit-building loans offer good ways to build credit because the lending company will report all payments to a credit bureau.
Credit-building loans can help people with little or no credit build good credit because they pose very little risk to the lending company. This is because the lender does not release any funds until the loan has been paid in full.
Best Ways to Build Credit with Good Habits
Perhaps the easiest way to build credit is through the practice of good financial habits. Building good credit habits can help lay a foundation for steady credit improvement over time. Existing credit accounts can be used in the best way to build credit.
Make Every Payment on Time
One of the most important ways to build credit is by making every payment on time, every time. It is not just payments for loans or credit cards that offer ways to build credit. Often, bills like utility payments or mobile phones are reported to credit bureaus as well.
Some bills that are not regularly reported for building good credit will be reported if they are delinquent. One of the best ways to build credit is to avoid activities that could lower it, so timely payments are crucial.
Even more importantly, unpaid bills are at risk of being sold to collection agencies, which can damage your score even more. Make a habit of paying every bill on time and you will have found the best way to build credit.
Maintain Low Credit Utilization
Maintaining low credit utilization is another of the best ways to build credit. Credit utilization is the measurement of how much a borrower uses of their available credit. Credit card companies calculate utilization as a debt-to-credit ratio that shows the difference between an account’s credit balance and credit limit.
Maintaining a low credit utilization ratio is considered to be responsible and show stability. Generating a smaller amount of debt makes an individual less likely to default on their payment because smaller debts are more affordable. Cardholders who do this seem less risky and are more attractive to lenders.
Keeping your utilization ratio low is one of the best ways to build credit. Many financial experts recommend a credit card utilization target of 30% or less. This ratio often makes up a large part of how credit scores are calculated, so keeping a low ratio is a good way to build credit.
Keep the Number of New Accounts Low
One way of building good credit habits is to refrain from opening a large number of new accounts at the same time. This is because credit age is usually a factor included in credit score calculation.
Credit profiles that demonstrate longevity are considered to be more stable and therefore more desirable. Opening many different accounts at the same time will lower your overall credit profile age, which can damage your score.
Keep Accounts Open
Another of the easiest ways to build credit is to keep accounts open for as long as possible. There will always be some instances when it makes more financial sense to close an account than to keep it open. However, frequently closing accounts can also affect the age of your credit profile.
Unless it is very necessary, keeping accounts open as long as possible can help when building good credit. This will increase the overall age of your credit profile, demonstrate stability, and prove to be a good way to build credit.
Check Credit Reports and Scores
One of the best ways to build credit is to stay informed about your score. Your credit score should be monitored to ensure that your current financial practices are effective.
It is also a good idea to check your credit reports. This can help you make sure that everything is accurate and guarantee that you are correctly using the easiest ways to build credit.
Credit Cards that Build Credit
Another of the best ways to build credit is through the responsible use of credit cards. Credit cards that are paid off on time each month and maintain a low utilization ratio can improve the holder’s score and be a good way to build credit.
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It can be difficult to be approved for credit cards to help build credit when the applicant has poor or nonexistent credit history. However, using credit cards to help build credit is not impossible for those with credit issues. Some ways to build your credit do exist.
Secured Credit Cards
Secured credit cards offer great ways to build your credit for individuals who are unable to qualify for traditional cards. Secured credit cards can be used like any other kind of credit card to help build credit, but their balance is guaranteed by a security deposit.
Credit card companies are often reluctant to offer cards to people with low credit or no credit because of the risk that a user might default on their payments. If a cardholder defaults, it causes the company to lose money and is to be avoided at all costs. This can make it hard to find good ways to build credit with bad credit.
In order to work with individuals with little or no credit, many companies offer secured options that can be used in the best way to build credit. A secured credit card is attached to a security deposit that is equal to the credit limit associated on the card. The security deposit is kept for as long as the card is active and only drawn upon to cover charges in the event that a cardholder fails to pay for their charges. This gives people with little or no credit the chance to use credit cards to help build credit without putting the company at risk of loss.
Use a Co-signer to Qualify for Credit Cards that Build Credit
Many banks and credit card companies also offer the option of using a co-signer. This is a good option that allows applicants with poor or limited credit to qualify for credit cards that build credit.
A co-signer will legally attach themselves to an account and make an agreement with the credit card company to be liable for all charges made to the account. This might be the best way to build credit for teenagers or students who are still supported by their parents.
This option requires a huge degree of trust between both co-signing parties as one is essentially agreeing to be on the hook for all charges. However, when done properly, the use of a co-signer is a good way to build credit.
Become an Authorized User on an Account
Another option for those struggling to qualify for credit cards that build credit is to become an authorized user on someone else’s account.
As an authorized user, you will be granted joint access to the account and can use the opportunity in the best way to build credit. Authorized users are not legally compelled to pay for the charges and so have more flexibility for qualification requirements.
It is crucial that the card issuer report authorized users to credit bureaus for this to work as a good way to build credit. This is not always the case, so check with the card issuer before you are added to the account to make sure it can be used as a way to build credit.
Benefits of Finding Ways to Build Credit
Finding the best way to build credit is a very important part of maintaining healthy finances. A good credit score can make it easier to qualify for a loan like a mortgage. Good scores can also make it more likely for an individual to qualify for loans or credit cards with lower interest rates.
Employing ways to build your credit can also help mitigate factors that can damage an existing score. Just as a high credit score can open doors, a low score can end up costing a lot of money.
For instance, people with high credit scores around 760 are able to qualify for mortgages with interest rates up to 1% lower than those with lower scores around 650. This is a significant difference that can add up to thousands of dollars over the course of the loan. Finding good ways to build credit can add up to tangible savings as well as increase opportunities.
Conclusion: Understanding Ways to Build Credit
Practicing good credit habits is one of the best ways to build your credit. There are a variety of ways to build credit, but they all require a degree of patience and dedication. Understanding how credit works, how it can be improved, and the options that exist for those with little or no credit is important to achieving your optimal financial life.
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Keep some of our larger points in mind:
- One of the easiest ways to build credit is to practice good financial habits
- There are a few different credit card options for those with poor credit
- Building credit with no credit can be difficult, but it is not impossible
- Credit can only be built from transactions reported to credit bureaus
Whether you hope to improve bad credit or need to build nonexistent credit, understanding different ways to build credit is invaluable. Good habits and credit building practices can follow you for a lifetime and can help improve your financial opportunities. However, it is important to keep in mind that every person’s finances are unique and your best way to build credit will be unique to your own needs.
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